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Social enterprise in OECD Member countries:

What are the financial streams?

SOCIAL ENTERPRISES IN AN EVOLVING ECONOMY. FROM NON PROFIT ORGANIZATIONS TO SOCIAL ENTERPRISES

Bucharest, Romania13 June 2007

Margie MendellConcordia University, Montreal, Canada

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Presentation plan

1. Social Enterprise2. Demand and supply of finance for social enterprise3. Sources of Finance Capital4. Nomenclature5. Synthetic overview of current sources6. Evolving financial landscape7. Solidarity finance8. Synthetic overview of evolving financial landscape9. Traditional investment lenses10. Potential financial sources for SEs11. Socially Responsible Investment (SRI)12. The need for new lenses13. Social capital market: A new framework14. Social risk capital: Canada, UK and US15. Development Capital and Solidarity Finance in Quebec 16. The role of government17. The role of government: selected policy milestones18. Investment challenges and barriers19. Challenges ahead20. Financial innovation system21. Selected illustrations22. Conclusions

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1. Social Enterprise

Social purpose enterprises with clear objectives to benefit the community

• citizen-based economic activity• broad based democratic governance structures• multi-stakeholder participation• limited profit distribution

Often seen as part of a “new welfare mix” as governments andcitizens co-design new forms of service provision

An alternative economic strategy for the production of goods

Contributing to a framework for a sustainable livelihood

Contributing to the development of collective/societal “capabilities”

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2. Demand and supply offinance for social enterprise

Demand

Pre-start upStart upConsolidationExpansion

Structural disequilibrium often occurs

D>S (equity; patient capital)S>D (loan capital)

Supply

Grants

Loans

Equity

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3. Sources of finance capital

Banks

Traditional philanthropy (foundations)

Government (at all levels) via direct involvement

Credit unions; cooperatives and mutuals

Individual investors

Growing social investment sector [from micro-finance to new sources patient capital (quasi-equity)]

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4. Nomenclature

A brief glossary of selected concepts:

• Social Investment (in French - finance)• Solidarity Investment (finance)• Ethical Investment• Socially Responsible Investment (SRI)• Community Based Investment• Program Related Investment (PRI)• Economically Targeted Investment (ETI)

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5. Synthetic overview of current sources

Source Examples

Government- Direct injection (i.e. CDFIs, participation in social investment funds)- Local funds (limited)- Tendering and contracting - procurement (Public markets)

Banks - Charity Bank (UK) (partnership with government)- RBC (Canada) (partnership with social investors)- US banks via the Community Investment Act- Alternative banking sector

Credit Unions, Mutuals, Co-

operative Banks

- Raiffeisen Bank (Germany, 1864)- Desjardins’ “Caisse Populaire” (Quebec, 1900) - Groupe Crédit Coopérative (France, 1893)- Banca Etica (Italy, 1994)- CREDAL (Belgium, 1984) - Fondation Macif (France, 1993)

Foundations - Traditional philanthropy

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6. Evolving financial landscape

Solidarity finance

Venture philanthropyNew investment strategies

• Program Related Investment (PRI)• Economically Targeted Investment (ETI)

Institutional investment

Social capital market

Patient capital

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7. Solidarity finance

• In Europe, solidarity finance (“finance solidaire”) is defined as the “art of managing money and its various facets - savings, investments, credit, account management… - being aware of responsibility and shared interests resulting in the desire for some to assist the others” (fineurosol.org)

Social and solidarity

savers(citizens)

Social and solidarity

saving products

Solidarity financial investors

Solidarity projects

• Two mechanisms of solidarity 1. Solidarity investment (“produit d'investissement solidaire”)2. Solidarity sharing ("produit de partage"):

• In Quebec, solidarity finance refers to all investment activities in the social economy (from micro-credit to patient capital)

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8. Synthetic overview of evolvingsources of finance

Source Examples

Solidarity financeSolidarity finance network (Quebec)Finansol (France, - 30,000 solidarity subscribers in 2001; 200,000 in 2005), INAISE, FEBEA, Réseau financement alternatif (Belgium, 1987), Fineurosol (2006)

Institutional investors

- Pension and insurance funds (shareholder activism) - Donor-advised funds (DAFs): Pioneered by Fidelity’s nonprofit Charitable Gift Fund (donor activism)- Calvert Community Investment Notes (1995, partnership between the Calvert Group and the Ford, MacArthur and Mott foundations).

Venture philanthropyProgram-related investment and social venture philanthropists (SVP) acting as investors in SEs (Venture Experiment Program by the Rockefeller Foundation, the Acumen Fund, etc.)

Individual investors- Angel investors- HNWIs- Diaspora financing- Individual savers and investors

Social capital market

- Generate a market as a means to create scale in the sector and increased capitalization by private investors such as patient capital/quasi-equity: Fiducie.Blue Orchard’s Private Equity in Microfinance (expected September 2007) and NEsST

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Government Funding

Private Investment

Charitable Donations

Blended Outcomes

?

Social Safety Net Civil Society

Wealth Creation

Source: Social Capital Partners: Investing in Social Enterprise, Presentation delivered at St. Michaels College, October 21, 2005.

9. Traditional investment lenses

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Form Activity Actors

Portfolio screening (exclusionary or inclusive)

Investments in financial markets using exclusion or inclusion filters based on environmental, social and governance (ESG) criteria

Ethical funds, foundations

Shareholderengagement (or activism)

Shareholders that utilize their role to influence the practices of enterprises

Pension funds, awareness raising organizations, some ethical funds

Development capital

Risk capital with socioeconomic goals (i.e. job creation, local and regional development, the environment)

Investment institutions run by labor unions, cooperatives), sustainable development funds (CleanTech)

Solidarity-basedfinance

Financing of community economic development and social enterprises

Micro-credit, financial cooperatives, hybrid financial funds

Responsibleinvesting

Responsibleindirect

investing("placement")

Source: M. Mendell and G. Bourque, "La finance solidaire: histoire d’une nouvelle pratique" in Marie Bouchard, (ed.) L'économiesociale au Québec, forthcoming 2007.

10. Potential financial sources for SEs

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11. Socially Responsible Investment (SRI)

Screening(not to invest in enterprises

failing to comply with environmental criteria and human

rights)

Affirmative financing(to describe consumers being

aware of, and intentional in, how their money is used. More

proactive and with the goal of promoting the general interest.)

EVOLUTION?

Tap CSR from multinationals to finance SEsThe conscious investment trend could be led by SEs

as they unlock the investment potential of companies and other investors...

Not investing in SEs yet… Already investing in SEs

Ethical Investment Conscious investment

14Source: Social Capital Partners: Investing in Social Enterprise, Presentation delivered at St. Michaels College, October 21, 2005.

Private Investment

Charitable Donations

E.g.

• Sustainability and Conservation

• Inner-city economic development

• First Nations economic development

• Affordable housingGovernment Funding

12. The need for new lenses

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13. Social Capital Market: A new framework

Source: Social Capital Partners: Creating Risk Capital for Social Initiatives, August 2003.

Charities

Government, Foundation, Corporate Grants

Community Venture Capital

Community Loans

Social Venture Capital

LabourSponsored

Funds

Community / Small Business /

Cooperatives

Potential Types of

Enterprises

Social Purpose Businesses

Larger / Higher Growth Business

Government

Private Sector

Charitable Foundations

Blended Returns

The Social Capital Market

Pure Social Returns Pure Financial Returns

Commercial Lending / Private Capital /

Public Capital

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14. Social risk capital: Canada, UK and US

Government Grants

Foundation Grants

Venture Philanthropy

Community Loans

Community Development

Venture Capital

Social Venture Capital

Canada *

United Kingdom

United States

Government accounts for 65% of social

funding

Nascent –used by a handful of innovative

foundations

Tend not to be as active as in other markets

Original VP market –several

players exist

Little venture financing exists. Some Labour Sponsored Funds and others provide limited socially motivated

funding

Loan programs

exist but are relatively limited

Several hundred loan

funds manage over

US$3bn

Over 50 CDVCs exist across the

USA

Dozens of VCs exist that

invest in social

business

Foundations make up a large portion of social funding. Still tend to be donor driven but

demonstrate some creativity

VP market is nascent – few players exist

in market

Market more advanced -

national coordination taking place

Growing market – promotion of social enterprise has been made a government priority

with an assigned cabinet minister

Risk Capital

Foundations are relatively

small and often donor

driven

Make up large portion of

funding. Show significant creativity

* The portrait for Quebec is different…

Source: Social Capital Partners: Creating Risk Capital for Social Initiatives, August 2003.

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Mouvement Desjardins - early 20th century

15. Development Capital and Solidarity Finance in Quebec

1996-2005Direct Investments in the social economy by these actors: CAN$755 million

Caisse d’économie solidaire Desjardins (1976)Fonds de solidarité des travailleurs(euses) du Québec (1983) (Labour

Solidarity Fund - Quebec Federation of Labour)Micro-credit finance (1990) - today networked: Réseau québecois du crédit

communautaireFondAction (1995); FilAction (2001) (Labour Solidarity Fund -

Confederation of National Trade Unions)Chantier de l’économie sociale (1996)RISQ (1997)Local development funds (1997)Social economy dedicated funds (1997) Investissement Québec (la Financière, 2001)La Fiducie (2007) Chantier de l’économie sociale

(Hybrid: Development capital and solidarity finance- patient capital (CAN$52.8 million- is now beginning its operations)

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16. The role of government

1. Enabling policy• Tax policy• Loan guarantees• Legislation• Direct injection of funds

2. A need for broad horizontal policy environments

3. A need for multi-stakeholder policy design

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17. The role of government: selectedpolicy milestonesUnited States:

• Community Reinvestment Act (1976-77) • Low-Income Housing Tax Credit (LIHTC, 1986)• New Markets Tax Credit Program (NMTC, 2000)• Creation of Community Development Financial Institutions(CDFIs, date back to early 20th century but officially recognized by the government agency, CDFI Fund, created in 1994)

Canada:• Labour Sponsored Investment Funds (LSIFs) and other Tax Credit Investment Funds (1980s) • Active participation of the Government of Quebec in the development of solidarity finance and development capital and theGovernment of Canada most recently in the creation of the Fiducie

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17. The role of government: selected policy milestonesUnited Kingdom:

• Community Development Loan Funds and the Local Investment Fund(1994) • Recommendations of the Social Investment Task Force (October 2000)• Community Interest Companies (CICs, 2005) • Community Investment Tax Relief (CITR, 2002)• Futurebuilders England (2003)

European Commission:• New Round of Structural Funds (Objectives: Convergence, competitiveness and Employment; European Territorial Cooperation)• European Employment Strategy (EES) Programme PROGRESS (2007-2013) • Complex set of indirect instruments: i.e. European Social Fund (ESF)

Belgium:• Universal Banking Service Act (2003)

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18. Investment challenges and barriers

• Address the burden of short-term indebtedness• Flexible instruments

Time

• As SE is a social construction a legal framework is required that recognizes its specificity (it is considered an exception in most laws on corporations)

• Fiscal advantages• Horizontal policy environment at national, regional and local levels

Lack of appropriate legislative and

institutional frameworks

• Create investment vehicles that respond to a diversity of needs (from micro-credit to patient capital)

Recognition of diversity of investment tools

• Supporting federations and networking (credibility, cross-investing, counseling, etc.)• Networking and professionalization• Communication strategies

Image of the sector

• Measure the Social Return on Investment (SRoI); Blended value; Double and triple-bottom performance; Social accounting (Enhanced Value Added Statement, EVAS) ; Return on Tax-Payer Investment (RoTI, to measure direct indirect and induce effects of government supported interventions)

• The Dow Jones Sustainability Indexes (DJSI, 1999); The FTSE4Good Index Series (2001)

Measurement and evaluation tools

• Enabling policy environment• Links with regional authorities (subsidiarity reduces risk)• Pooling of risk (i.e. co-funding strategies)• Credit enhancement• Creation of intermediaries• Partnerships (multi-stakeholder)• Knowledge creation and training environment (organizational cycles, funding logics, etc.)• Technical assistance and support available

Risk

How to meet these challenges?INVESTMENT BARRIERS

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19. Challenges ahead

Philanthropic potential via the growth of wealth in CEE need for monitoring

Exclusive reliance on micro finance in high risk market conditions can generate a ‘debt trap’ – role of enabling public policy to prevent this.

Developing public-private-community partnerships (critical role of banks).

Ensuring supportive legal and regulatory frameworks and enabling institutional contexts (considerable political commitment, local actors’ international community’s support).

A need for a systemic approach in which financial needs are accompanied by supporting structures including training, enabling policy, information sharing, etc.

Avoiding the reduction of SEs to activities for training and enlarge their field of action to also include community based initiatives (to address geographic barriers to employment and wealth generation).

Pursuing important work on measurement and evaluation

Lack of clarity on the part of SEs in the articulation of social and environmental added value.

For CEE countries:

A need for networking and/or federating this sector (examples such as FEBEA and EMA demonstrate the value of a large network of actors)

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20. Financial innovation system

• Diversity of Sources• Diversity of Products• Networks/Federations• Opportunities for Individual, Collective and

Institutional Investors• Enabling Policy and Legislative Environment• International Cooperation and Knowledge Sharing• International Organizations

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20. Financial innovation system

Sources Products

Social Enterprises

Partnerships

Networks/Federations

International organizations/international cooperation

Institutional/organizational/legal innovation

Research/Education

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Networks and International Federations

Micro Finance/Community Development Financial Institutions (CDFIs)• Europe – European Micro Finance Network (EMN)• USA – Opportunity Finance Network (formerly National Community Capital Association);

CDFI Coalition• UK – Community Development Finance Association (CDFA)• Quebec- Réseau québecois de crédit communautaire (RQCC)

Solidarity Finance (Social investment; alternative banks)• Europe – FEBEA (European Union of Finances and Ethical and Alternative Banks),

Fineurosol• International – INAISE (International Association of Investors in the Social Economy)• Quebec:

• Informal network of finance actors in solidarity finance, and development capital, including credit cooperatives, labour solidarity funds, regional and local development intermediaries

• Key role played by the Chantier de l’économie sociale (network of networks of social economy actors)

21. Selected illustrations

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Networks and International Federations

Individual Savers and Investors• International – Credit unions, cooperatives and mutuals• Quebec – Labour Solidarity Funds – retirement savings• Caisses d’economie solidaire• Belgium - CREDAL - important cooperative financial institution investing in social

enterprise that also provides patient capital• France – Finansol – labeling/branding; attracting solidarity savings• UK - Charity Bank – triple bottom line returns: tax relief of 25% over 5 years -

personal return; interest donated to a “charity” -social return; capital return. (potential for social enterprise

• USA - Investors circles (providing profit social entrepreneurs with patient capital)

21. Selected illustrations

Socially Responsible Investment (accessing private equity markets)· Europe - Eurosif· United States – Social Investment Forum· Canada – Social Investment Forum

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Partnerships and Consortia• International – NESsT (strategic partnerships with venture capital/private equity in Czech Republic, Hungary and Slovakia to promote venture philanthropy)• France - Finansol, France Active • UK – Futurebuilders England

Institutional/organizational/legal innovation• Canada – a variety of provincial tax benefits for investment in community/social enterprise; policy innovation in Quebec• Quebec – la Fiducie du Chantier de l’économie sociale• UK – Critical work done by Social Investment Task Force leading to the creation of Community Interest Companies with supporting tax benefits• Futurebuilders England (includes procurement strategy)• USA – Community Reinvestment Act

International Organizations• ILO (Social Finance Unit)• OECD (LEED – extensive work on social enterprise and the social Economy)• United Nations Environment Programme Finance Initiative (UNEP FI)

International Cooperation and Knowledge SharingInvaluable role played by “mentor: institutions (eg. South Shore Bank and Blue Orchard in Switzerland)

21. Selected illustrations

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22. Conclusions

Need for research (cross-national comparisons, best practices, tested models, etc)

Importance of networks extends beyond the actors in the sector to include professional associations (lawyers, accountants, etc.)

New financial architecture that allows for long-term planning and innovative income generation strategies by SEs

SEs must be recognized for their capacity to create socially inclusive wealth

It is not only about money: knowledge creation and sharing, training environments, guidance, production of toolkits, introducing SEs into higher education curricula...